The Real, Real Price of Gasoline: Probably Lower Than You Think

Gasoline prices toy with our minds in way few other products can. As behavioral economist Dan Ariely once explained:

For the several minutes that I stand at the pump, all I do is stare at the growing total on the meter -- there is nothing else to do. And I have time to remember how much it cost a year ago, two years ago, and even six years ago. Yet I have no such memory about the prices of items in any other category. I have no idea how much milk was six years ago, how much bread was three years ago, or how much yogurt was a week ago.

Everyone can relate to this.

But there are flaws that come from our obsession with gas prices.

The big one is that most Americans earn more today than they did in past years -- especially in nominal terms (not adjusted for inflation). While the price of a gallon of gas is up 170% since 1990, the average hourly wage doubled during that time, making the "real" rise in gas prices much smaller than it appears.

But there's a lot more to this story than that.

Two other powerful forces have indirectly affected how much Americans pay at the pump:

Average fuel efficiency has increased tremendously over the past two decades, particularly since 2005.

Americans are driving fewer miles per year now than they were in the past. That's in part due to a weak economy, but it's also due to demographics and urban living trends (more on that here).

Both have to be considered to get a sense of the real, real price of gasoline -- not just the sticker price we see at the pump, but the actual impact it has on our finances.

Doing so isn't terribly complicated, and it leads to this:

Source: Department of Transportation, Energy Information Agency, Bureau of Labor Statistics. The formula used to calculate this graph is: (average gas prices/average hourly wages of nonsupervisory workers) * (annual miles driven per capita/average MPG of passenger cars). This produces an index figure, which was then scaled using March 2013 gas prices as a base.

There are two big takeaways from the chart.

One is that gas prices are much higher today than they were during the 1990s and early 2000s. There's no disputing that.

The other is that real gas prices are no higher today than they were a decade ago. That's largely due to two factors. In 2003, the average new passenger vehicle got 29.5 miles per gallon, while today a new car averages 35.6 MPG. And annual miles driven per capita has declined 5% over the past decade.

To me, that highlights one of the most important forces people ignore when forecasting future demand: Consumers' ability to adapt to higher prices. And that adaptation, of course, was born out of last decade's gas spikes that ate into consumers' wallets. "The key to high prices is high prices," as the saying goes.

Daniel Yergin, an energy analyst who won a Pulitzer for his book The Prize, calls efficiency and conservation "the fifth fuel," writing that "many would not even think of it as a fuel or an energy source. Yet in terms of impact, it certainly is." He continues:

The United States uses less than half as much energy for every unit of GDP as it did in the 1970s ... a new car in the 1970s might have averaged 13.5 miles to every gallon. Today, on a fleet average basis, a new car is required to get 30.2 miles per gallon.

It will also probably serve as one of the most important solutions to global energy problems, writes John Authers of The Financial Times:

This spasm of activity [shale boom] has put to rest the fears that "peak oil" production had arrived, fashionable during the price spike five years ago. But there is a limit to how far supply can be increased, and political and economic limits to the environmental damage that can be tolerated.

Once popular bets on alternative energy technologies have now fallen out of favor. Ethanol production led to a spike in agricultural commodity prices, for example. That leads to a new theory: that the next five or 10 years will be devoted to a bid to improve energy efficiency.

It's already more than a theory. The new fleets of vehicles being produced by Ford (NYSE: F) and General Motors (NYSE: GM) have a common denominator: A forceful push away from power and size toward efficiency. Whether it's an SUV or a tiny commuter car, efficiency now sells, and that's what automakers are delivering.

Oscar Wilde once wrote about those who know "the price of everything but the value of nothing." He may as well have been talking about how we think about gas prices.

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I shake my head when I hear stories like this, american carmakers were kicking and screaming when pestered about mpg, i.e.' nobody would put up with the bad performance'.

In 1986 I bought a 1.3 litre Honda Civic, didn't need power windows or steering but did have air conditioning. It lasted well over 300,000 miles and only stranded me once when I forgot about cleaning a fuel filter. Its lifetime average was just over 45mpg. It only dropped below 40mpg when there was 3 to 5 inches of snow or it was below zero. 33mpg? I did that in 1963 with a beetle!

One of these days (he says as the arctic ice disappears) we'll have to start talking about the real, real, REAL price of gasoline- including subsidies and tax breaks to Big Oil, air and water pollution (from fracking, pipeline ruptures, etc), a super-expensive global military presence (which itself is one of the world's biggest consumers of oil), blood spilled in foreign lands, and the big elephant in the room, climate change leading to increasing numbers of multi-billion dollar disasters, droughts, and extreme weather.

Increased MPG is a great step, but we also need to keep the big picture in mind. The actual, true cost of gasoline, oil, etc is actually a lot higher than the price we see on the meter. We need a carbon tax so we can get on with transitioning to alternatives.

Seems to be a treadmill situation. Oil-producing countries, whose economies need the export prices to be high enough to sustain their governments, manipulate the supply side of the equation... which means that NO MATTER how efficient consumers are, the prices will stay high.

A wistful memory: Back in the 70s, Arab oil countries were seen to have everyone in it's grip with the pump prices "soaring" to 36 cents!

Wars fought for oil have been many, the last one in Iraq was "free" per GW Bush which means we will be paying for that war and the interest on the debt for generations, the real cost of gas includes wars, pollution, and the best government money can buy.

When the economy tanks and stays there for all these years, average new car mileage matters even less because people can't afford them. Used car prices have soared over the last 5 to six years, so that means more people are driving older cars thus not getting the benefit of the newer more expensive better mileage. Driving a tiny little smart car or 70s Civic is only helpful if you remain alive in a car accident to enjoy it. I'll keep putting my family in something more substantial. Meanwhile inflation of gas prices is still not included in the published inflation index. Yeah , right.

^ Yes. The article says the gains were smaller than they appear in nominal terms, not that they were wiped out. It explicitly says gas prices are higher than they were in the 1990s, even after all adjustments for wages and fuel efficiency.

I was done with this story when I hit the part that average wages double in the 90s. It didn't for me or anyone I knew. And I do remember the price of eggs, meat, bread and such. As well as these prices at the beginning of 2008. But, mostly it was $4 a gallon gas in 07 that started this land slide we call the recession. I also know there has been no recovery and this mess is only going to get worst. I'm also tired of being lied to about it.

In the 1960's when I was a lad gasoline was around 25 cents per gallon, bread was 10 cents, a bottle of soda was 10 cents, candy bars were a nickel, and you could get 3 pieces of bubble gum or candy for a penny. The minimum wage at that time was less than a dollar. Going to the grocery store to purchase food for a family of four was about $25 for a week.

Today gasoline costs more than 10 times as much, bread is 15 times or more as much, same for a bottle of soda, candy bars are not quite as bad being around only 12 times as much, and forget penny candy. Minimum wage is only about 9 - 10 times as much. Grocery shopping costs considerably more to feed the family of four today. Today both parents have to work to pay the bills while back then only one parent worked in most homes and there was enough money to do these things with some left over.

We are not better off today than back then. We now have credit card debt up to our eyeballs, we have homes that are far bigger than what is necessary, there is more than one vehicle per family, TV's in every room, hooked to a phone in our ears everywhere we go, and we can't sleep at night for all the worry over how we are going to pay our bills.

The price of gasoline contributes only a portion of the cost of transportation. I find it useful to think of dollars per mile traveled rather than dollars per gallon. In NYC, the fuel costs come out to roughly $0.15 to travel one mile. For my daily commute on the bus and subway, the total cost is roughly $0.30 per mile. However, I don't pay the toll to cross the bridge, nor do I pay for parking. Even excluding the cost of the car and its maintenance, commuting by public transportation costs me less than traveling by automobile.

I've seldom seen such irrational thought put in writing! Saying gas costs less if you use less is an absurdly stupid thing to say. The "real, real, real" cost of gasoline is the price on the pump. If you want to compute the inflation based cost relative to average salaries, that is legitimate. But say gas costs less if you use less is ... well, it's just plain stupid.

I agree that relative inflation rates and fuel economy have worked to lower the financial impact of gasoline purchases. However, the "real" price of gas is what is posted on the pump. Price is distinctly different from cost, and distinctly different from "financial impact." The price per gallon of gas is the same for my Mustang GT as it is for my Mazda 323, as it is the same for a bus-sized RV that gets 6 miles per gallon.

Don't confuse financial impact with price. They are not at all the same thing.

"n 2003, the average new passenger vehicle got 29.5 miles per gallon, while today a new car averages 35.6 MPG."

Can you cite a source for this? According to a study by the University of Michigan, the average new car sold is 2012 got about 24 MPG. Very few cars sold today rate over 35. According to the EPA, a 2013 Civic with a 1.8 Liter engine and manual transmission gets 31 MPG.